Taxes. The word alone can induce anxiety, exhaustion, stress, and even depression. Are there any good words associated with taxes? Maybe “refund.”
Many of my clients dread tax time because it takes them hours to compile all the necessary paperwork, forms, receipts, and documents in general. It is why so many of us wait until the last minute to make our appointment. While the type of documents you will need to file will vary from person to person, you can put the documents into categories such as personal information, income, personal expenses (deductions) and business information.
While taxes can be daunting, they certainly do not have to be. I’d like to take a few minutes and go through a few ways to make taxes less anxiety-inducing.
Collect Income Info. & Expense Info.
Each year starting in January, you will receive statements and forms pertaining to filing taxes from employers, financial institutions, etc. Start by making a file to put these in and categorize them into one of the following:
- < >
Personal expenses (deductions)
Creating a system to keep track of everything needed for taxes will help cut the time down it takes to find everything. Simple steps like starting a file or folder that you keep in your file cabinet (or computer, if you’re paperless), where you can put documents you think you may need for taxes will save you a ton of time in hunting down each item.
If you’re tired of all the paper, consider going digital. It cuts down on storage and depending on your preference, might keep you more organized.
Review Previous Years
For many of us, few things change year to year when it comes to filing taxes. Reviewing your previous year’s tax return is a great way to remind yourself of the areas that could otherwise be overlooked, such as interest, dividends, or infrequently used deductions. It can also be a way to review anything new that has come up in the last year that you need to address.
Fund IRAs and SEPs to the Limit
If you participate in an employer-sponsored 401(k), 403(b), or other qualified retirement plan, the deadline for contributions is December 31st. However, if you have an IRA or a Roth IRA, the deadline to fund to the max is April 15th.
If you are younger than 50 years old and have contributed less than $5,500 for the current year, or older than 50 years old and have contributed less than $6,500, you can still put money in to count from last year.
If you are self-employed, you can set up a simplified employee pension (SEP) IRA until the due date of your tax return, including extensions. You may contribute up to 25% of your self-employment income per year.
While Roth IRA contributions are not tax deductible, IRA and SEP contributions are fully deductible depending on your income, filing status, and participation in an employer retirement plan.
Outsource Tax Calculation & Filing
Filing taxes yourself is unnerving. It is easy to make mistakes, record lines wrong, and don’t get me started on the fear of an audit. Not to mention the hours it can take to review tax code and necessary forms.
Fortunately, there are several options to alleviate this stress for you in the form of software programs, such as TurboTax, or making an appointment with a service, such as H&R Block. The IRS has even simplified things by offering free tax filing for taxpayers with an adjusted gross income (AGI) of $58,000 or less.
I highly recommend consulting an experienced tax professional before filing taxes if you fall into one of the following:
Have a gross income greater than $150,000
Participate in complex investments managed through partnerships or private businesses
Experienced a significant change in income or expenses during the previous year, or a life-changing event such as death of a spouse of partner, divorce, marriage, bankruptcy, change in number (or status) of dependents, or if you retired.
Started or closed a full-time business, purchased or sold a home, rented a home or room, received or paid significant fines or penalties in a lawsuit
Are concerned that tax filing will trigger an audit from the IRS
Are concerned calculations may not be completed accurately or entirely.
The cost of advice you would get from one of these services is probably worth the peace of mind.
Do Some Homework
Tax laws and the interpretation of tax law is always changing. Even if you are using a tax advisor, be sure to try and understand the tax issues and treatments that will affect you as much as possible to help you make the best decisions.
Even spending an hour or two researching online some specific situations or conditions that you might be affected by will help you determine which way to file or what to do for each situation. For example, searching “new marriage tax information 2018” will help you figure out what needs to be done before next year when you need to file.
You can never know too much about income taxes.
If you file early, you have a better chance at having information readily available and reduces confusion, tension, and losing any pertinent information or documents. Also, you must file every year anyway. The sooner, the better, and you can be done with it. You can also get your refund back sooner.
Prepare for Next Year
While it might be too late to do anything about this year’s tax bill, it is never too soon to begin planning and making changes for next year to reduce any liabilities you might have.
If you have a large amount of unpaid taxes at the end of the year, a huge refund, or you expect a significant change coming (marriage, baby, new home, etc.), consider reducing your withholding allowance so more is collected from your paychecks during the year, or increasing the withholding allowance to have more money distributed to you each pay period.
In theory, taxes work best when you break even—you haven’t paid too much in to the government and they won’t send you a bill for what you owe.
A Final Note
Preparing for taxes does not have to be a hassle. We do it to ourselves through procrastination and being disorganized. Following these tips will ensure you spend April 15th stress free instead of rushing to file. If you have any questions, I’m happy to answer any to the best of my ability or refer you to some talented people who do this for a living. My door is always open.